Micro 1 - Reasons For Growth And Principal Agent Problem

Question 1

Why do firms seek growth?

Answer 1

1. increased profit, due to an increase in sales
2. decreased costs (economies of scale)
3. market power, power over prices and supernormal profit
4. diversification, increasing the range of goods and services sold (can reduce risk as companies aren’t reliant on one country/good/service for revenue)
5. Managerial objectives (increased bonuses for CEOs)

Question 2

Why do some firms prefer to stay small?

Answer 2

1. Worries about diseconomies of scale
2. Firms owners might not want the extra work and risk
3. Small firms are easier to operate legally (lower costs)

Question 3

Why are some firms forced to stay small?

Answer 3

1. Banks see expansion as risky, might be difficult to get a loan
2. They operate in a niche market where there isn’t much room for expansion
3. Not all businesses have the skills and knowledge to expand
4. Firm may not have enough resources

Question 4

What are private firms?

Answer 4

Firms not owned by the government

Question 5

What are public sector firms? (Two examples)

Answer 5

Firms that are owned by the government. NHS and network rail

Question 6

What are Not for Profit firms?

Answer 6

Charities that provide goods and services without having profit as the main incentive

Question 7

What is the Principal-Agent problem?

Answer 7

The principal of a company/firm is the main shareholder and the agent is someone who handles the day-to-day running of the business. The problem arises when the agent makes decisions that do not necessarily align with the direction the principal wants to take the company in. This can be the result of information gaps or from not communicating.